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Global Wealth Management: How does the Muslim world do it?

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By Mateena Hammad

“Global Attitudes to Islamic Wealth Management” opens the door into the US$2.8 trillion world of the Islamic finance industry. This enlightening and unprecedented report was compiled by Jersey Finance, a not-for-profit organisation representing Jersey as an international finance centre (IFC), in partnership with Gateway Global. This report sheds light on the specifics of the Islamic legal framework for wealth management as well as the views and attitudes of Muslim high-net-worth, ultra-high-net-worth individuals (HNWIs/UHNWIs) and family offices on wealth management including succession planning, fiduciary planning, inheritance, tax, current and future demands for investment products, ethical alignments and the distinctions between different jurisdictions.

The importance of understanding Shari’a compliant wealth management is paramount as the potential of this particular sector of the financial services industry remains understated and underserved despite the Islamic finance industries’ US$ trillions in assets. Although in the past 20 years international investment banks have made Shari’a compliant financial instruments increasingly sophisticated in structure, the level of innovation has slowed, getting in the way of market growth. This has restricted the versatility and supply of Islamic products and services despite substantial demand for Islamic private wealth management services. Recent spikes of activity in the Islamic finance industry, however, suggest a rebounding interest in the supply side; intermediary companies, regulators and related stakeholders have begun working towards closing the product gap by tackling fundamental policy and infrastructural issues. The trend towards socially responsible investing (SRI) and environmental, social and governance (ESG) standards has become an important catalyst for the accessibility and visibility of Shari’a compliant management, especially “NextGen” individuals desiring social returns on their investments. 

Background of the Shari’a Framework for Islamic Wealth Management

Before delving into the complexities of the Islamic finance market, the report provides a brief, but useful, understanding of the Islamic jurisprudential rulings regarding wealth management and succession called fiqh al muamlat (jurisprudence of transactions). Based on divine knowledge revealed to humanity through the Holy Book, Qur’an, and the sayings of the Holy Prophet Muhammad (Peace Be Upon Him) called Ahadith, the framework is implemented to prevent familial disputes (maintain unit preservation), ensure equitable distribution, maintain a solid social welfare system, and provide Muslims with personal autonomy over their wealth, within “reasonable” limits. Essentially, rulings are based on the doctrine of “deeds are based on intentions”; all Muslims are obliged to spend and give wealth in the form of trade, succession or charity to sustain the circulation of wealth for equitable distribution across society. This framework legally binds Muslims on matters related to Faraidh (inheritance), Wassiya (property transfer as a bequest), Zak’ah (obligatory annual wealth tax), and waqf (trust) amongst others. 

Whilst Islam allows Muslims a great deal of autonomy over how to conduct their matters during their lifetime, upon their death, aside from arrangements stated in the deceased’s will that is approved as compliant with Shari’ah jurisdiction, strict rules and conditions of wealth succession are implemented to leave no room for disputes and/or actions to circumvent the parameters. As stipulated by the Qur’an (4:11) and (4:12), upon the demise of a male Muslim the closest male relatives (i.e. sons) receive twice the portion of female relatives of the same proximity to the deceased (daughters). The parents are given one-sixth each, but in the case where the deceased has siblings, only the mother is given the one-sixth portion. In the case of only daughters, two-thirds of the wealth left behind is divided equally between them. Regarding the wealth of the female deceased, in the case where the female has no children, the spouse is given half of her estate but where she has children the spouse receives a quarter whilst the children are given the rest via the same 1:2 ratio between sons and daughters as mentioned previously. For the portions of wealth remaining after the main portions have been distributed to the nuclear family members, these are distributed to the remaining relatives directly proportional to the level of closeness unless they have been specifically endowed to other individuals in the will of the deceased. 

Research Methodology and Findings of the Survey

On behalf of Jersey Finance, between June and July of 2021, Gateway Global conducted a worldwide survey to analyse the views of HNWIs/UHNWIs, family offices and private asset managers on Islamic wealth management. The survey consisted of 190 questions regarding 8 Shari’a compliance topics: Asset Classes, Sectors, Jurisdictions, Ethical Alignment, Performance, Tax, Succession Planning and Philanthropy. The survey was closed with a total of 2,048 responses by respondents in 17 different jurisdictions with just over half (51%) domiciled in the UK and one-fifth (21%) from the Gulf Cooperation Council (GCC) countries. The respondents were predominantly (80%) in the 31-60 age bracket with the remaining 20% being over the age of 60. Of these respondents, almost 62% represented company treasuries, 32.3% represented multiple individuals’ wealth and 5% represented family wealth. Respondents were asked to rate the importance of different Asset Classes, Sectors, and Jurisdictions for their investment decision making currently as well as in 18 months’ time. The measurement system provided was to allot them into 4 different classifications; Staples, those classes of high importance as of now and also in the future; Breakout, those classes with low importance as of yet but high return expectations in the future; Abating, classes with high importance as of now but predicted to taper in the future; and Laggards, those financial instruments of low importance now and in the future as well.

Real Estate and Infrastructure ranked at the top in the Staples category for Asset Classes and Sectors due to stable returns that are crucial for Shari’a compliance and investor security. Venture Capital, Equities, and Cash & Equivalents were also amongst Staples due to large returns and tax relief (the latter depending on different jurisdictions). Only Fixed Income was considered an asset class for the Breakout category most likely due to the unsatisfactory yield environment for investors recently. For the Abating category, no asset class was mentioned; however, multiple asset classes were put under the Laggard category including Structured Products, Commodities, and Crypto and Digital Assets although these classes showed more potential due to some respondents (21%) categorising them in higher categories; Hedge Funds, Art & Collectibles, Precious Metals and Insurance-Linked Products were more unanimously considered Laggard classes. Unsurprisingly, Islamic investors remain traditionalist in their investment strategies, relying on the security of returns that heavyweight assets like Real Estate, Equities and Cash Equivalents provide along with their Shari’a compliant asset-backed nature. It also explains investor anxiety regarding less-tangible assets such as Crypto & Digital Assets and Hedge Funds and seemingly non-Shari’a compliant assets such as Insurance Linked Products. Such preferences accurately showcased respondents’ risk perceptions as 80% of Muslim investors preferred a balanced risk appetite with only 16% choosing risk-taking as their dominant feature (making sure to state that they also wished to incorporate low-risk assets into their strategy). Additionally, the majority of respondents (81%) favour direct investing themselves rather than indirect investments which could also explain their risk-averse nature. 

For the category of Jurisdictions, results reveal that the UK was the only jurisdiction considered to be a Staple owing to its well-implemented protection of property rights and legal framework. ASEAN and GCC jurisdictions were amongst the top-rated Breakout jurisdictions mainly because of their Islamic heritage; West and Southern Africa, Australasia and China and Hong Kong were also mentioned as aspiring jurisdictions. Despite being in the Laggard category, East Africa and the United States have the most potential to transition to the Breakout category, followed by non-GCC Middle Eastern and North African countries; South Asia and Central & South America are the lowest in potential from this category.  No jurisdiction was placed in the Abating category. When questioned about the importance of onshore locations for structured investments compared to IFCs currently as well as in 18 months’ time, using a 1-5 Likert scale, respondents leaned more towards onshore locations (3.2) than IFCs (2.9) for current investments but showed a preference for IFCs (3.4) over onshore locations (3.1) for investments over the next 18 months showcasing the former’s rising popularity amongst Muslims. 

Regarding questions on Ethical Alignment, the majority of the respondents (62%) chose Shari’a compliant products over other conventional types regardless of poor performance, whereas 48% of respondents chose solely ethical products regardless of poor performance. In terms of due diligence, exactly half of the respondents said that they did not consult internal/external advisory boards for Shari’a compliance knowledge and 46% of respondents said that they did not consult any advisory bodies for ethical compliance knowledge, with both respondent groups opting to rely on their own knowledge instead. Due to the lower percentages for both groups, there remains more potential and opportunities to be maximised if they were to seek professional advice and better consumer education. The survey also discovered a declining trend for Shari’a compliant products as the preferred framework for investment decisions with 56% of respondents agreeing there is a need for more jurisdictions to innovate and construct new ethical finance approaches beyond just the scope of Shari’a compliance, suggesting the incorporation of social impact initiatives such as the United Nations Sustainable Development Goals (UNSDGs), ESG, and UN Principles for Responsible Investment (PRI). 

When asked in the survey about their satisfaction with their wealth management, the survey focused on three specific criteria over the past 5 years which were: the level of expertise in account management, objective decision-making abilities and the quality of client service. The overarching view (75%) was positive and respondents were content with the products and services provided to them. As for tax advice, 71% of respondents were satisfied in general with their tax advisors’ performance for the past 5 years. Regarding views on philanthropy and its significance, 96% of respondents asserted that it was important for them to ensure they engaged in philanthropic activities and 79% further stated that they had already made significant contributions with the intent to continue doing so. 83% also added that it was meaningful for them to give charity in line with their faith. On the question of the portions of wealth to be given in philanthropy, the results were more mixed. The consensus of 67% of the respondents was that anywhere between 10-50% was a fair amount, with 37.1% choosing between 10-25% and 29.9% choosing to donate 25-50%. 10.4% desired to give over 50% with 7.3% even claiming that all their wealth should be given to charity. 

The section of the survey on Succession Planning, arguably the most salient section, inquired about respondents’ objectives and concerns with succession planning, use of trusts, awqaf (types of waqf), and foundations in succession, and preferred jurisdictions. The most notable response was that 96% desired their heirs to inherit their wealth, with 36% already taking the appropriate steps to secure their succession and the remaining 60% in the process of doing so. The opportunity for wealth management professionals and jurisdictions to capitalise on these future wealth transfers can not be understated over the coming years. Of these respondents planning succession, 57% stated that they plan to take tax advice and 63% plan to take Shari’a compliance advice whilst only 32% have tried using awqaf in their planning strategies though 99% of them have expressed positive reviews of it. 76% of respondents shared that trusts are an important aspect of their succession planning and the top 5 most favoured jurisdictions to conduct their affairs are Jersey, the UK, Dubai International Financial Centre (UAE), British Virgin Islands (BVI), and Malaysia. On the other hand, only 30% of the respondents stated that they have looked into foundations for their succession planning, listing the DIFC (UAE), Jersey, the UK and Cayman as their most favoured jurisdictions for foundations. Lastly, when asked about the primary concerns they may harbour regarding succession planning, most respondents noted that they were most worried about the smoothness of the transition of inheritance and potential infighting within the family that may jeopardise family unity. Other concerns included retaining wealth in the family, generating profit on the wealth for future generations, and prevention of wealth misuse or misplacement. 

To learn more about Shari’a rulings on wealth management and succession, be sure to join the Commonwealth Chamber of Commerce’s online Fireside Chat event as we sit down in conversation with Faizal Bhana, Director – the Middle East, Africa and India, and senior lead on Islamic finance at Jersey Finance, to discuss the findings of the report and the world of Shari’a finance. Register now using this link here

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